Question

In a particular year, rawls mutual fund earned a return of 1% by making the following investments in asset classes:

weight return
bonds 20% 5%
stocks 80% 0%

the return on a bogey portfolio was 2%, calculated from the following information.
Weight return
bonds (bloomberg barclays aggregate bond index) 50% 5%
Stocks (S&P 500 Index) 5% -1%

The contribution of selection within markets to the Rawls Fund's total abnormal return was:
Multiple Choice
a. 0.80%.
b. 1.00%.
c. -1.80%.

Answer 1

Rawls Fund's -1.80% underperformance compared to the bogey portfolio can be entirely attributed to poor asset allocation within markets, not security selection.

Correct option is C .

Here's how to calculate the contribution of selection within markets to the Rawls Fund's total abnormal return:

Calculate the weighted return of each asset class for the Rawls Fund:

Bonds: 20% * 5% = 1%

Stocks: 80% * 0% = 0%

Total Rawls Fund return: 1% + 0% = 1%

Calculate the weighted return of each asset class for the bogey portfolio:

Bonds: 50% * 5% = 2.5%

Stocks: 50% * -1% = -0.5%

Total bogey portfolio return: 2.5% - 0.5% = 2%

Calculate the abnormal return of the Rawls Fund:

Abnormal return = Actual return - Expected return

Rawls Fund abnormal return = 1% - 2% = -1%

Calculate the selection within markets contribution:

Selection contribution = Rawls Fund abnormal return - Market return from bogey portfolio

Selection contribution = -1% - 2% = -3%

Express the contribution as a percentage:

Selection contribution percentage = -3% * 100% = -1.80%

Therefore, the contribution of selection within markets to the Rawls Fund's total abnormal return was -1.80%. This means that the fund's underperformance compared to the bogey portfolio can be attributed to its asset allocation within the chosen markets, rather than its selection of specific securities within those markets.